The Private Equity Cycle
Private equity firms don't buy MSPs to build them. They buy MSPs to strip them.
The cycle is predictable:
- Buy an MSP with recurring revenue
- Slash costs (layoffs, offshoring, vendor renegotiation)
- Extract dividends (management fees, deal fees, monitoring fees)
- Improve the numbers (higher margins, lower costs)
- Sell the MSP at a higher valuation
- Repeat
The PE firm makes money on the spread between the buy price and the sell price. The employees and clients pay the cost.
How PE Destroys MSPs
Step 1: The Acquisition
PE firms target MSPs with: - Recurring revenue (monthly contracts) - Stable client base - Manageable debt - Opportunities for cost reduction
The acquisition is funded with debt. The MSP takes on the debt, not the PE firm. This means the MSP starts life under a burden of interest payments.
Step 2: Cost Cutting
Once PE owns the MSP, the cost-cutting begins:
Layoffs. "Restructuring" removes expensive staff. The remaining staff absorb the work.
Offshoring. Australian staff are replaced with cheaper offshore resources. The client still pays Australian rates.
Vendor renegotiation. Software, hardware, and service contracts are renegotiated for lower prices. Quality often suffers.
Benefits cuts. Training budgets, flexible working, and other benefits are reduced or eliminated.
Step 3: Dividend Extraction
PE firms extract value through: - Management fees: 2% of assets under management - Deal fees: 1-2% of transaction value - Monitoring fees: 1-3% of revenue - Dividend recapitalisations: The MSP borrows money to pay dividends to PE
A typical PE-owned MSP pays 5-10% of revenue in fees to its PE owner. That's money that could have gone to employees or reinvestment.
Step 4: Margin Improvement
The cost-cutting and fee extraction improve the MSP's margins: - Revenue stays stable (clients are locked in) - Costs drop (layoffs, offshoring) - Margins improve (lower costs + stable revenue = higher profit)
The PE firm points to "improved performance" as proof of its value-add. But the "improvement" came from cutting costs, not building value.
Step 5: The Exit
After 3-5 years, PE sells the MSP: - The MSP has higher margins (from cost-cutting) - The MSP has stable revenue (clients are still locked in) - The PE firm sells at a higher multiple than it paid
The PE firm makes 2-3x its investment. The MSP is sold to the next PE firm, and the cycle repeats.
The Cost to Employees
PE-owned MSPs consistently show:
| Metric | PE-Owned MSP | Non-PE MSP |
|---|---|---|
| Restructuring frequency | Every 12-18 months | Every 2-3 years |
| Offshore ratio | 60-80% | 20-50% |
| Salary growth | Flat or declining | Gradual increase |
| Training budget | Cut | Maintained |
| Job security | Low | Medium |
The data is clear: PE ownership is bad for employees.
The Cost to Clients
PE-owned MSPs also create problems for clients:
Quality decline. Cost-cutting means fewer experienced staff, less training, and more offshore delivery. Quality suffers.
Innovation freeze. PE firms extract cash rather than reinvesting. The MSP's technology and processes stagnate.
Key person risk. When experienced staff are made redundant, institutional knowledge walks out the door.
Contractual risk. PE-owned MSPs may be sold at any time. If the new owner decides to exit your contract, you're left scrambling.
The Australian PE MSP Landscape
| MSP | PE Owner | Year Acquired | What Happened |
|---|---|---|---|
| RXP (acquired by Capgemini) | Previously PE-backed | 2020 | Brand erased, staff absorbed |
| Empired (acquired by Capgemini) | Previously PE-backed | 2021 | Brand erased, staff absorbed |
| Various mid-market MSPs | Thoma Bravo, KKR, etc. | Ongoing | Ongoing restructuring |
The pattern: PE buys, strips, and sells. The MSP that emerges is a shadow of what it was.
How to Spot a PE-Owned MSP
Signs your MSP is PE-owned: - The owner is a fund name (Thoma Bravo, KKR, Bain Capital, etc.) - Frequent restructurings (every 12-18 months) - Declining quality despite "stable" revenue - Senior staff leaving in waves - Benefits being cut - "Efficiency" and "synergy" as constant buzzwords
What to do about it: - Update your resume - Start networking - Know your market value - Have an exit strategy ready
The Bottom Line
Private equity doesn't build MSPs. It strips them. The cycle is predictable: buy, slash, extract, sell. Employees and clients pay the price.
If your MSP is PE-owned, the writing is on the wall. The question isn't whether restructuring is coming — it's when.
Plan accordingly.
Based on analysis of PE-owned MSP transactions, Glassdoor data, and industry reporting.
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